FHA Hits Brakes on Housing With Budget Cuts: Mortgages

The so-called sequestration, $1.2 trillion in automatic reductions in federal spending, would pare about 8.2 percent from the budgets of most federal agencies. Photographer: Victor J. Blue/Bloomberg

Feb. 28 (Bloomberg) -- U.S. spending cuts scheduled to kick
in tomorrow will constrain the availability of Federal Housing
Administration mortgages that account for about a quarter of
originations, threatening its role in the year-long housing
recovery.

Department of Housing and Urban Development cuts will force
staff reductions that could slow FHA loan approvals and curtail
programs such as foreclosure counseling, according to HUD
Secretary Shaun Donovan. If FHA lending drops by the same rate
as HUD’s budget, it could shave about 2 percent off U.S. home
sales this year.

The so-called sequestration, $1.2 trillion in automatic
reductions in federal spending, would pare $42.7 billion from
non-defense federal agency budgets this year, according to
government estimates. For real-estate, the impact would be
magnified because FHA’s market share has grown to five times its
2006 level as it expanded its role during the property bust.
Since 2008, the FHA has backed more than a quarter of U.S.
mortgages, according to HUD data.

“The FHA has been a critical support to the housing
market, for first-time buyers and purchases of homes in
general,” said Mark Willis, a professor at New York
University’s Furman Center for Real Estate and Urban Policy and
a former economist at the Federal Reserve Bank of New York.
“Any decrease in the rate the FHA is able to ensure mortgages
will clearly hurt housing.”

Hearing Today

The Senate Banking Committee will hold a hearing today in
Washington on the agency where there will be “significant
discussion about raising the FHA down payment requirement,”
which is currently 3.5 percent, Jaret Seiberg, senior policy
analyst at Washington Research Group, a unit of Guggenheim
Securities LLC, wrote in a note today. They’re also likely to
address consequences to FHA lending “if the sequester hits on
Friday or if Congress fails to fund the government beyond March
27,” he wrote.

An index of 11 homebuilders fell 1.3 percent today in New
York paring its gain this year to 6.1 percent. The measure has
risen 72 percent over the past 12 months as investor confidence
has grown in the housing recovery. The median home price last
month rose 12 percent from a year earlier, the biggest gain
since 2005, according to the National Association of Realtors.
Home sales in January increased to a 4.92 million annual rate,
43 percent above a record low two years ago.

Fed Buying

The housing recovery, engineered by the Federal Reserve’s
program of buying mortgage bonds to lower borrowing costs, has
been successful enough that the central bank should reduce the
pace of the acquisitions, Federal Reserve Bank of Dallas
President Richard Fisher said yesterday. This week, the average
rate for a 30-year fixed mortgages is 3.51 percent, down from
4.95 percent two years ago, according to Freddie Mac.

Still, the budget cuts will trim half a percentage point
from economic growth in 2013 and cause 1 million job losses,
according to the Bipartisan Policy Center in Washington.

“Across-the-board, draconian cuts will hurt the housing
recovery,” said Diane Swonk, chief economist at Mesirow
Financial Inc. in Chicago. “Housing will still have momentum,
but a lot less momentum.”

The reductions will boost the unemployment rate, which was
7.9 percent in January, a quarter of a percentage point and keep
it elevated for several years, Macroeconomic Advisers LLC said
in a Feb. 19 report.

‘Additional Burden’

“Given the still-moderate underlying pace of economic
growth, this additional near-term burden on the recovery is
significant,” Fed Chairman Ben S. Bernanke said in
congressional testimony this week. The cuts will have “effects
on jobs and incomes,” he said.

While deep budget cuts could bruise the real estate market,
reducing federal debt will support housing demand in the long
term by putting the economy on firmer ground, said Joshua
Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in
New York.

“There’s no way to get around the painful and negative
effects of the cutbacks we need to put our fiscal house in
order,” Shapiro said. “When the adjustments are happening,
it’s not going to feel good.”

The cuts stem from a 2011 agreement to raise the debt
ceiling and were intended to force Congress to reach a
compromise on reducing spending. About half the reductions come
from defense and half from domestic spending. The Obama
administration doesn’t expect to see a deal reached by
tomorrow’s deadline, Dan Pfeiffer, a senior White House adviser,
said on a conference call with reporters on Sunday.

Softening Blow

If Congress and the White House don’t act in time to avert
the spending cuts, they may be able to soften the blow in coming
weeks, said Mark Zandi, chief economist for Moody’s Analytics
Inc. in West Chester, Pennsylvania. They may agree to slow the
pace of the reductions, or target them more precisely to limit
the economic fallout, he said.

“We may see a more rational approach, instead of cutting
across the board,” Zandi said. “They may find a way to make it
hurt less.”

Reducing access to FHA-backed mortgages would reverse an
expansion in loan availability, said NYU’s Willis. The approval
rate for all home-purchase mortgages rose to 61 percent in
January, up from 56 percent a year earlier, according to
Pleasanton, California-based Ellie Mae.

Lower Revenues

Fewer FHA loan guarantees also means lower revenue for the
agency. In November, an independent audit of the FHA showed it
was on shaky financial ground and could require a cash infusion
from the government. A reduction in lending volume means the
agency forgoes upfront fees of 1.75 percent of balances that FHA
Commissioner Carol Galante has said are key to improving its
finances.

“If we are going to see improvement in the housing market,
we need to be able to accommodate new buyers,” Willis said.
“For some first-time buyers, this is the only kind of mortgage
they can get.”

Growth in home sales and prices underpin the consumer
spending that accounts for about 70 percent of the economy.
Household purchases rose at a 2.1 percent annual rate in the
fourth quarter after increasing at a 1.6 percent pace in the
previous three months, the Commerce Department said today.

“Increases in home prices have a very big effect on
consumers and households and is certainly behind the recent
strong growth in consumer spending,” said Nariman Behravesh,
chief economist at Englewood, Colorado-based IHS Inc.
“Households can see homes selling in their neighborhoods, they
know what is happening to their home value, and as a result they
are going to spend more.”